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Equity analysts from Autonomous have said in a new report that reinsurance capital appears disciplined as it eases into a soft market environment that may prove different this time, with capacity still being deployed at very attractive rates.
The general trend has been towards softening, but the analysts note that most of the data points available are focused on property catastrophe reinsurance, while for the diversified reinsurers the overall softening for their portfolios is less pronounced, given other lines of business have held up better and faced less competition so far.
A combination of global reinsurers deploying retained capital from their earnings and growing amounts of alternative capital from the insurance-linked securities (ILS) markets have fuelled the softening of the market.
However, differentiation exists even within property catastrophe risks, as higher-layers are reported to have softened the most and it’s important to remember that softening has begun from a particularly high base.
The Autonomous analysts summarised, “Having enjoyed the benefits of exceptionally hard pricing since 2022 (and ~100% price improvement since 2017), the reinsurance market is now seeing pricing soften as incumbents deploy retained earnings into the market, but at still very attractive rates.
“While there is a willingness to grow, and clearly no shortage of capacity, the market appears disciplined.”
The relative absence of new market entrants is seen as “a positive for cycle discipline” this time around and the “softening needs to be put in context of cumulative rate increases of 150%,” which is a figure based on date from broker Howden.
Influencing the figures from the mid-year reinsurance renewals and some renewals earlier in the year, has been the improvements seen in that marketplace, Autonomous notes.
There is hope legal and tort reform can also influence the health of insurance markets in other states, the analysts suggest.
This is an important factor to consider, that while Florida softened again at the mid-year renewal it has done so against a much healthier backdrop for those carrying risk there, with greatly reduced claims litigation activity and attachment points still holding largely firm.
For the above reasons and factors like the Florida market improvement that has been seen, the Autonomous analyst team believes this soft market will be different.
They explain, “How does the start of this soft cycle compare to those in the past? On average, the cumulative decline across the first two years of a soft cycle is -18.5%. So far, the 2025 rate decline of -6.6% appears a very modest rate when overlaying against other, similar periods.
“History suggests a further 12% decline will follow, although as we have noted in our initiation, we think this cycle is a little different to prior experience, which we think manifests in a slower pace of rate decline. Further supporting this notion, when looking back at prior soft cycles, the softening seen in year 2 has typically been of equal size, +/- 1% of that year 1.”
Meanwhile, in their report the Autonomous analysts also note that reinsurance capital is at all-time-high levels currently, with insurance-linked securities (ILS) contributing through the robust catastrophe bond market growth that has been seen.
“This has also led to the steepest pricing declines in the upper layers, where competition from alternative capital is most prevalent and subsequently driven declines, according to brokers,” the analysts said.
Adding that, “However, expected returns to investors remain favourable, with YTD pricing in-line with 2022 levels, and still modestly above the longer term average rate, as seen in the charts below. Further when comparing yield after expected losses, we see that it is still above high-yield equivalents, providing an attractive alternative for investors.”
However, the most significant driver of capacity is reinsurers high returns and retained capital levels, on which the analysts say, “We expect profitability/ROE remains attractive for the reinsurers, through 2026 and 2027, barring any major events.”
With the reinsurance market still “comfortably” earnings it costs of equity, leading the analysts to say “we fundamentally believe the reinsurers/ LM names are still highly profitable.” (LM = London Market).
They conclude, “We continue to ascribe to the view that the sector remains in a position to enjoy excess returns on capital, while returning excesses of capital to shareholders. We appreciate the best has passed, but equally we don’t think investors should be overly concerned that the market will move to price inadequacy any time soon.”
That reads-across positively for ILS managers and their investors as well, with sticky terms, conditions and attachments largely seen through the renewals this year so far.
The competitive nature of the reinsurance market will need watching closely towards the end of this year, especially if catastrophe losses remain in-line with averages and if hurricane season proves light (remember, there’s still a long way to go). As that is the one element, outside of the expected continually building capital base, that could result in softening accelerating into 2026.
Read all of our reinsurance renewal news coverage.
Reinsurance capital disciplined, returns attractive, soft market may be different: Autonomous was published by: www.Artemis.bm
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